AOL's Armstrong Key to Verizon's Bid for Yahoo

Company Presenting Itself as Best Bet to Take On Google, Facebook

Published on July 19, 2016.

As Verizon's bidding battle for Yahoo comes down to the wire this week, the phone giant is betting that victory will be determined not only by its cash but by the strategy and leadership it has planned for the internet pioneer.

Verizon, Quicken Loans founder Dan Gilbert and Vector Capital Management submitted bids by Yahoo's Monday deadline, along with AT&T and private equity suitor TPG, according to people familiar with the matter. A decision could be made in about a week, one of the people said.

While some of the parties may view Yahoo as a collection of assets that could be realigned or broken apart, Verizon sees a complementary set of businesses that could find a home alongside its AOL properties. And Verizon is confident it has a key asset to make the integration a success -- AOL Chief Executive Officer Tim Armstrong, according to people familiar with the company's strategy.

With the wireless industry maturing, Verizon has been buying up internet and advertising technology companies, including AOL, and presenting itself as the best bet to take on Google and Facebook. Yahoo has millions of users; a collection of websites including Flickr, Tumblr and Yahoo Finance and Sports; and some useful digital-ad tech like Flurry and BrightRoll. Together with AOL, the new Yahoo under Verizon may have a better chance of competing in a digital ad market dominated by two big players.

And with Yahoo Chief Executive Officer Marissa Mayer taking heat from investors for not pulling Yahoo out of its tailspin, Verizon could appeal to a need for stewardship and offer up Mr. Armstrong as the right person to restore the value of the assets, said Walt Piecyk, an analyst with BTIG.

"The vilification of Mayer should make it easy for Verizon to pitch the potential management synergies offered by Tim Armstrong," Mr. Piecyk said.

Seven months after Verizon publicly expressed its interest in Yahoo, the process is still dragging on. Verizon's main interest is in Yahoo's core business, not so much in the patent portfolio or real estate, which is why its initial bid was below other offers of about $5 billion, according to people familiar with the matter. Verizon doesn't see the inclusion of patents or office properties as a deal breaker, although it's unlikely to bid for them, the people said. Yahoo may sell its patents separately and may get anywhere from a few hundred million dollars to $1 billion for them, said the people.

"Verizon's always seemed one of the front-runners, and also one of the few bidders that wasn't about just trying to strip the assets and focus on some much smaller core," said Jan Dawson, an analyst with Jackdaw Research.

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"That might be attractive to Yahoo, especially if Mayer and others want to try to secure futures at the company for as many employees as possible, though obviously their primary responsibility is to the shareholders," Mr. Dawson said.

Mr. Armstrong and Ms. Mayer may have paved the road for Verizon to acquire Yahoo. They're both Google alums who found themselves running failing web portals as mobile technology and social media were changing their industry. In 2014, before Verizon acquired AOL, the two discussed a merger of AOL and Yahoo.

Today Mr. Armstrong runs AOL as a semi-autonomous media and advertising business with the blessing of Verizon Chief Executive Officer Lowell McAdam and the head of new businesses, Marni Walden. This year AOL posted its best first quarter in five years, a sign Mr. Armstong's ad strategy may be working.

For his part, Mr. Armstrong has also become a deal-maker. Last year, through AOL, Verizon acquired Millennial Media to develop its mobile-advertising business, a segment of the ad market controlled by Google and Facebook.

Yet whether or not Verizon succeeds in acquiring Yahoo, transforming from telephone carrier to a complex mobile internet and media platform will be difficult. Companies don't change stripes very easily, Mr. Piecyk said.

"Over the past 20 years we've seen operators try to inject themselves into new businesses and usually that's ended up with poor outcomes," he said.